April 21st, 2017
A ‘Second Set of Eyes’ -Voluntary Pre-Filing Review of Offering Memoranda by Canadian Securities Regulators
Preparing an offering memorandum (an OM) is no easy task. An issuer does not want to miss a form disclosure requirement or make a misrepresentation in its OM when raising capital under section 2.9 of National Instrument 45-106 – Prospectus and Registration Exemptions (commonly referred to as the OM exemption). Missing a requirement or making a misrepresentation has serious consequences which are discussed below.
So what can you do?
New Brunswick and Saskatchewan have each established a program that allows a locally established entity within their respective jurisdiction to voluntarily pre-file its draft OM with the securities regulatory authority for review and comment before providing a final OM to investors. If either jurisdiction is not an issuer’s principal regulator, then we understand that an issuer cannot avail itself of this service. So how does it work?
Pre-Filing a draft OM with the New Brunswick Securities Commission (NBSC)
In New Brunswick, issuers who have a registered office in the Province may provide a draft OM voluntarily for staff review and comment to identify any significant issues before it is used. The availability of this service is set out in Local Staff Notice 45-701 Voluntary Pre-Filing of Draft Offering Memoranda under National Instrument 45-106 Prospectus and Registration Exemptions (the NB Notice).
The NB Notice states that the NBSC reviews and compares an issuer’s pre-filed OM to the prescribed form requirements under the OM exemption and provides comments when an item is unclear or needs further clarification.
Issuers must understand that: (a) Staff’s comments do not indicate that the NBSC has assessed the merits of the offering or evaluated or endorsed the disclosure. Issuers are reminded that an OM must state that no securities regulatory authority or regulator has assessed or reviewed the merits of the security; and (b) the NBSC has not commented on whether there are any misrepresentations in the OM since it has not undertaken any due diligence review of the offering. Simply, issuers should look at this type of pre-filing review as a ‘second set of eyes’ to help reduce the risk of failing to satisfy the prescribed disclosure requirements under the OM exemption.
Any comments provided by the NBSC relate only to New Brunswick and are typically provided within 20 business days. There may also be a fee associated with such a filing.
Pre-Filing a draft OM with the Financial and Consumers Affairs Authority (the FCAA) (the Saskatchewan securities regulatory authority)
In Saskatchewan, issuers may also voluntarily pre-file a draft OM with the FCCA for staff review and comment before it is used. Staff Notice 45-706 Voluntary Pre-Offering Review of Offering Memorandums Under NI 45-106 Prospectus and Registration Exemptions sets out the details. The FCCA states that issuers have regularly used this service since its inception in 2008 and it is primarily used by first time issuers.
In 2011, the FCCA published an amended Staff Notice 45-704 Review of Offering Memorandums under NI 45-106 Prospectus and Registration Exemptions (SK Staff Notice 45-704) and noted a number of disclosure deficiencies. A discussion of common OM disclosure deficiencies will be the subject of a future blog post but should be reviewed and considered by an issuer as it prepares its OM.
So what happens if you fail to comply with the OM disclosure requirements?
The OM exemption is based on providing sufficient and prescribed disclosure to investors thereby allowing an investor to make an informed investment decision. Failure to comply with the prescribed form requirements under the OM exemption may result in certain consequences. SK Staff Notice 45-704 provides a summary of such consequences which is set out below.
- Suspending the offering – Staff at a Canadian securities regulatory authority (Staff) may request that the offering be suspended until investors are provided with proper disclosure;
- Providing investors with remedial information - Staff may request that an issuer provide remedial information to investors;
- Preparing and delivering an amended OM to investors – Staff may request that the OM be amended or amended and restated and delivered to investors;
- Offering investors rescission rights – Staff may, in addition to providing investors with an amended OM, require an issuer to provide investors with a right of rescission whereby investors can request the return of their investment. This remedy is extremely problematic if an issuer has no ready access to cash to satisfy any such requests and may require an issuer to sell many, if not all, of its assets in order to make such payments. For example, what if an issuer has invested in real estate? In such circumstances, an issuer would have to sell its land to make such payments which could result in the demise of the issuer;
- Issuing a cease trade order – the Director may issue a cease trade order whereby an issuer must immediately cease trading in its securities until the order is revoked;
- Enforcement action – Staff may take enforcement action against the issuer and others and has the ability to levy sanctions including fines and removing the right of certain individuals and entities from relying on exemptions and/or to be an officer and/or director of an issuer; and
- Civil action – if an OM has a misrepresentation, an investor also has a civil right of action. In Saskatchewan, for example, investors have a right of action against everyone who signed the certificate in an OM and under section 141 of the Saskatchewan Securities Act.
Issuers must ensure they get it right and satisfy the OM form requirements under the OM exemption. If they don’t there are serious consequences. Although a pre-filing review is a useful service, issuers are encouraged to work with experienced legal counsel to help them comply with their disclosure requirements.
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This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. For legal issues that arise, the reader should consult legal counsel.
Co-author – Alixe Cormick is the founder of Venture Law Corporation located in Vancouver, British Columbia and a member of the Advisory Board of the National Crowdfunding Association of Canada. You can reach Alixe by phone at 604-659-9188, by e-mail at firstname.lastname@example.org, on twitter @AlixeCormick or on Google+.